Ukraine Threatens Oil and Gas Cut-Off in Russia Sanctions

Ukraine said it’s open to halting Russian gas supplies to Europe through the country as it plans sanctions on President Vladimir Putin’s government. Photographer: Vincent Mundy/Bloomberg

Aug. 8 (Bloomberg) -- Ukraine threatened to block Russian
oil and gas supplies to Europe in new sanctions against Vladimir
Putin’s government, which it blames for a separatist uprising
that has ravaged the country’s east.

Ukraine, which no longer receives any gas from Russia but
acts as a conduit for its neighbor’s European customers, is
considering a “complete or partial ban on the transit of all
resources” across its territory, Prime Minister Arseniy
Yatsenyuk told reporters today in Kiev. It may also ban Russian
planes from its airspace and cut defense-industry cooperation.

“There’s no doubt that Russia will continue its course --
started a decade ago -- aimed at banning imports of Ukrainian
goods, limiting cooperation with Ukraine, pressure and
blackmail,” Yatsenyuk said. “In the most negative scenario for
Ukraine, losses during the first year may reach $7 billion, not
only because of sanctions but also because of the Kremlin’s
aggressive policy.”

The threat may signal that the government in Kiev
calculates it has little to lose. It comes a day after Russia
banned food imports from Ukraine, the U.S., the European Union
and other countries that blame it for stoking the worst geo-political crisis since the Cold War. Gas prices in western
Europe rose on the news of Ukraine’s sanctions plan, which would
require parliamentary approval.

Less Dependent

Ukraine hasn’t received Russian gas since June 16, when OAO
Gazprom cut its supplies in a debt and pricing dispute. The
country will manage at least until the end of the year by using
stored gas and reducing consumption, according to NAK Naftogaz
Ukrainy Chief Executive Officer Andriy Kobolyev.

Ukraine transported 86.1 billion cubic meters of Russian
natural gas and 15.6 million metric tons of oil last year,
according to a February bond prospectus. That’s about half of
Russia’s total gas exports, though less than 7 percent of oil
shipments.

“That’s pretty significant, so I can see why prices are
going crazy,” Trevor Sikorski, head of gas, coal and carbon at
London-based consultants Energy Aspects Ltd., said by phone.
“It is quite an extraordinary statement. Western European
governments are not going to be happy with this.”

Winter gas in the U.K., Europe’s biggest market, jumped as
much as 2.6 percent to 62 pence a therm ($10.42 per million
British thermal units), the highest level since July 29 on the
ICE Futures Europe exchange. Dutch gas for September rose as
much as 2.8 percent to 18.60 euros ($24.91) a megawatt-hour on
the Title Transfer Facility hub.

Other Routes

Gazprom stopped shipping gas through Ukraine for almost two
weeks in 2009, leaving several EU states including Bulgaria and
Slovakia without supplies. It has since worked on other transit
routes, including opening Nord Stream, which pumps gas under the
North Sea, in 2011. Gazprom also plans to complete the South
Stream project with European utilities such as Italy’s Eni SpA
and France’s Electricite de France SA, by 2019.

Russia also has routes to ship oil that bypass Ukraine, and
restrictions would have a bigger effect on Ukraine’s budget and
EU countries, Igor Dyomin, a spokesman for Russia’s oil pipeline
operator, OAO Transneft, said by phone. The Russian Energy
Ministry and Gazprom declined to comment immediately.

Bond Losses

In Washington, the American Petroleum Institute lobbying
group said Ukraine’s announcement underscored the need to speed
the approval of natural gas exports, even if U.S. gas won’t
replace Russian fuel in Europe anytime soon.

“If policy makers act now to allow free trade, U.S. energy
exports can further reduce the impact of unrest overseas and
limit the influence of foreign suppliers that dominate other
markets,” John Felmy, API’s chief economist, said in a
statement. The group’s members include Exxon Mobil Corp. and
Chevron Corp.

Ukrainian government bonds extended losses, with the yield
on the dollar note maturing in July 2017 climbing 10 basis
points to 11.04 percent. The hryvnia also weakened even after
the central bank intervened yesterday to stabilize the currency.
Russian stocks gained after losses yesterday in the wake of the
import ban. The Micex Index rose 1.1 percent in Moscow.

Ukrainian lawmakers will vote Aug. 12 on the sanctions
bill, which was approved by the cabinet today. It would enable
the government to use 26 types of penalties, including possible
asset freezes and bans on participation in state asset sales.

The government put forward a list of 65 companies, mostly
Russian, and 172 individuals against whom penalties might be
imposed. Russia’s Energy Ministry is also assessing risks
because of U.S. and EU sanctions and will take measures to
bolster the oil and gas industry, including steps related to
replacing sanctioned equipment, Energy Minister Alexander Novak
said in a statement today.

The one-year Russian restrictions on fish, meat, fruit,
vegetables and dairy goods leave a $9.5 billion hole for
domestic companies and developing nations such as Brazil to
fill. The ban, which also applies to Canada, Australia and
Norway, is designed to “protect national interests,” according
to a decree signed by Putin.

Latest Fighting

Ukraine’s army engaged separatists, who’ve been pushed back
toward the cities of Donetsk and Luhansk by a government
offensive in recent weeks, in 44 firefights during the past 24
hours, military spokesman Andriy Lysenko told reporters in Kiev
today. Seven soldiers and eight border guards were killed, he
said.

Tens of thousands of Donetsk’s 1 million people have fled
amid civilian deaths, power cuts and water shortages. The city
council has accused both sides of shelling. Lysenko rejected
that accusation, saying only the rebels are doing so.

Ukraine is continuing to come under fire from Russian
territory, Lysenko said, accusing its neighbor of keeping up a
supply of heavy weapons, equipment and vehicles to the rebels.

Putin is facing increasing isolation over the rebellion in
Ukraine, which ignited when he annexed Crimea from Ukraine in
March. More than four months of fighting has killed almost 1,400
people and displaced hundreds of thousands more, according to
United Nations estimates.